MERGERS AND ACQUISITIONSCASE STUDY

ONJET AIRWAYS ATTEMPTED ACQUISITION OF AIR SAHARA

Guided By – Prof. Neha Chauhan

Introduction

Acquisition

About the acquisition deal

> Response > Competitors >Analysts > Chairman of JA

Ultimate failure.

THE INDIAN AVIATION INDUSTRY• In the early 1990s implementation of the open skies policy by the government of India

• After the liberalized number of private carries entered such as East West Airlines (EWA), Modiluft, Damania Airways (DA), NEPC, Air Sahara(AS) and Jet airways (JA)

• By the end of the 1990s only two private carriers AS and JA remained in the industry. And these two airlines provided competition to Indian airline (IA) throughout the 1990

• Jet airways become more popular because of their on time performance and efficient services

• In early 2000s it had replaced Indian Airline (IA) as the leader in the airline industry

>>• In 2003-04 IA, JA, and as were facing more competition to Air

Deccan for low cost carriers(LCC)

• In 2005, three more LCCs namely, Spice Jet, Go Air, and Paramount Air and Kingfisher airlines

• Indigo, Visa Air, and other were getting ready to take off in 2006. The LCC were popular due to the low fare and gaining market share from the full service airline companies.

• In 2006 the market share of LCC stood at 27%

• Centre for Asia Pacific Aviation (CAPA) was expected to increase as 50% by 2010

• Thus the full services airline in India were faced with the difficult task of finding new ways to retain their position in the industry

Jet Airways

Introduction

JA had agreement with 123 foreign carries

JA incurred losses

Opened up the aviation sector by allowing pvt. Players

JA went for an IPO

Co. market share has dropped

JA lost a number of its pilots.

Air Sahara Introduction Sahara India Airlines Ltd.(Sahara Airlines) was established in

sep 1991 by Sahara India Pariwar.

Sahara Airlines began operations on December 3, 1993with 2 Boeing 737-200s.

By the end of the 1990s, Sahara Airlines had established itself one of the leading players in the Indian Airline industry.

Sahara Airlines also won several awards for its in-flight services.

In 2000, Sahara airlines re-branded itself as “Air Sahara”

AS Growth Plan In 2002 Air Sahara invested over $40 million on expanding its fleet and the reach

operations.

The Company tapping new segments such as Pligrimage and Tourism Traffic and began operating flights to places of pilgrimage and tourist spots.

During 2002, Air Sahara Rs. 1 billion on the sponsorship of the Indian Cricket Team for a period of three years.

Air Sahara also initiated advertising and marketing compaign included a variety of incentives to its passengers.

In 2003, AS expanded its fleet by leasing new aircraft such as Boeing 737-700s, and smaller Canadair Regional Jets from Bombardier.

The Co. also introduced new promotions and schemes such as ‘Sixer’ and ‘Super Sixer’ discount fares.

In 2003, AS also entered into tie-ups with ICICI Bank and Standard Chartered Bank whereby passengers could pay for their tickets in twelve monthly installments at 0% interest.

This all helps to AS market share had increased to 13% from around 5-6 percent in 2000.

Achievements

In 2004 when AS flew to colombo, it became the first domestic private carrier to operates flights to an international destinations.

In 2004, AS flew to domestic destinations and one international one.

Set Backs

Analysis were not clear about the positioning of AS even after 10 years of its existence. According to them the airlines could neither establish itself as a premium airline nor could it be called an LCC.

Further Plans In 2005 AS Announced that it was planning to purchase aircraft for

the first time.

In addition the co. would also lease brand new boeing aircraft.

In2005 AS announced that Hyderabad would be first hub for flights to domestic and international destinations. Bangkok, Kuala lumpur and Singapore

In March 2005 AS went in for a new look and adopted the colors the Indian flag.

In Late 2005 As entered into a code sharing agreement with American airlines, a Us based Airlines.

By late 2005 AS had 27 aircraft that carried 3.5 millions passengers to 24 domestic and international destinations every year.

INDIAN AIRLINES

On 28may1953,the GOI enacted the Air Corporations Act, and established two companies namely, IAC and AII.

IAC was renamed Indian Airlines Ltd.in 1994.

IA began facing stiff competition from the private carriers after liberalization of the airline industry in the early 1990s.

In 2000s IA was affected by the terrorist on the WTC in the US.

In 2002-05 ,IA was force to undertake a variety of short-term and long-term measures to improve its financial situation as well as its position in the industry. Results of this measures IA earned profit of Rs. 6.561 billion for fy 2004-05.

In 2006, IA together with Alliance Air had a fleet of 62 aircraft.(est. 1996)

In 2006, IA flew to 58 domestic and 19 international destination.

THE PROPOSED DEAL

AS announced that it was exploring opportunities for private placement of its equity, airline companies such as Spice Jet showed an interest in acquiring a stake in the company.

At this time, JA did not express any interest in acquiring a stake in AS.

Instead , kingfisher Airlines, an airline owned by Vijay Mallya,was considered a serious contender for AS. Said Mallya ,”I valued Sahara less as I can’t pay for parking slots that belong to the state.”

Even as the Kingfisher-Air Sahara deal failed to materialize, there were reports that JA had started negotiating with AS to acquire the entire shareholding in the company.

In Jan 2006 ,JA finally announced that it had entered into talks with AS for ‘strategic alliance’.

On19 Jan2006 ,JA announced that it had agreed to pay $500 million in cash to acquire a 100% stake in AS.

Benefits For Jet Airways Market Share ( JA 35% & AS 11% )

Company Growth ( AS had 27 aircraft and operated 136 flights/pd, whereas

JA owned 53 & operated 290 flights/pd)

Parking Bays ( 26/49 in Mumbai & 23/46 in Delhi )

International Destination ( AS - London, Singapore, Chicago, Kathmandu, Colombo JA – UK, US, Thailand, Singapore, Malaysia etc. )

Economies of Scale

The Challenges

1. JA needs to work hard to sustain this position in the long run

2. IA and AI were taking steps to improve their operations.a. IA had become profitable in 2004b. IA and AI were also expected to go for IPOc. Mr. Prafful Patel also announced that IA and AI

would be merged

3. JA had been overvalued AS because ofa. AS was not profitable airlineb. AS was not known for its service quality

>>

4. Certain routes of JA and AS were overlapping and hence JA may not able to fully utilize the 11 percent market share of AS

5. AS’s fleet was comparatively older than JA’s fleet.

6. All aircraft of AS were leased and some leases were due to expire in 2007.

7. JA and AS had two different work cultures.

Monopoly Concern

Market leader in airline industry.

Apposition from airlines like kingfisher Airlines, Air Deccan etc & formation of alliance called IAOA.

Acquisition of parking slots.

Approval from GOI for transfer of ownership.

Reversal of prices .

THE DEAL FALLS THROUGH

March

24th 200

6

•Directorate General Of Civil Aviation (DGCA) in picture.

•Reason- Infrastructure Rights to JA

•Agreement extension—90 days

March

30th 200

6

•GoI clearance –Transfer of assets .

•Constraint

May 200

6

•Agreement between JA & AS regarding key positions in the organization.

•Location– AS headquarters Lucknow.

•Reasons?

June

2006

•Escrow account problem.

•Date of expiry of account—21st june 2006.

•GOI acts as a hurdle.

21st June

2006

•Deals breaks between JA & AS.

•Suit against each other.

•AS against JA at Lucknow High court & JA against AS at Bombay High Court.

•REASONS?